For fiscal first-quarter 2018 (to end-September 2017), optical and photonic optical component and subsystem maker Lumentum Holdings Inc of Milpitas, CA, USA has reported revenue of $243.2m, down 5.8% on $258.1m a year ago due to softer telecom demand but up 9.2% on $222.7m last quarter. The return to strong sequential revenue growth is driven by 3D sensing business ramping up, counteracting the headwinds in the telecom and datacom markets.
Optical Communications revenue was $207.9m (85.5% of total revenue), down 4.8% on $218.3m a year ago but up 11.3% on $186.8m last quarter. Of this, Telecom revenue fell 33% year-on-year and 8% sequentially to $110.4m. Datacom revenue was $45.2m, up 2% on a year ago but down by 10% ($5m) sequentially due to weaker-than-expected demand on 100G products. In contrast, Industrial & Consumer revenue was $52.3m, up 217% sequentially and over 500% on a year ago, due primarily to the 3D sensing ramp for consumer mobile applications (contributing about $40m).
Commercial Laser revenue was $35.3m (14.5% of total revenue), down 1.7% on $35.9% last quarter and 11.3% on $39.8m a year ago, with an increase in kilowatt fiber lasers being offset by declines in other lasers. “We made progress on the production of our new Gen 3 kilowatt fiber laser [launched a few months ago] and grew fiber-laser revenue by 19% sequentially to $12.9m,” notes chief financial officer Aaron Tachibana. During the quarter, fiber-laser production was constrained due to specific materials, so the firm was unable to satisfy customer demand.
“We rapidly ramped our 3D sensing revenue, received significant new orders for these products and made excellent progress on next-generation design-ins at numerous customers with our VCSEL [vertical-cavity surface-emitting laser] and edge-emitting lasers,” says president & CEO Alan Lowe. “We also received our first high-volume order for edge-emitting lasers from an Asian-based consumer electronics customer,” he adds. “Since April of this year we have received more than $300m of 3D sensing customer orders, which we began to ship in earnest over the past few months.”
“Other notable milestones include achieving production readiness on our 100G transceivers in our new Thailand factory and surpassing 20,000 units of Twin TrueFlex ROADMs [reconfigurable optical add-drop multiplexers] shipped since their introduction. These types of ROADMs are central to next-generation network architectures, and the level of shipments shows our continued leadership in this area [with capacity now exceeding $60m revenue per quarter],” continues Lowe.
On a non-GAAP basis, gross margin is down from 34.2% a year ago but up from 32.9% last quarter to 34% due mainly to a favorable product mix.
In particular, Optical Communications gross margin was 34.7%, up from 31.1% last quarter, due partly to the increase in volume for 3D sensing products (with Industrial & Consumer gross margin being above the corporate average). This is despite Commercial Lasers gross margin falling further, from 43.2% a year ago and 42.1% last quarter to 30%, due mainly to writing down excess and obsolete inventory of older-generation product.
Operating expenses were $54.1m, up from $52.8m last quarter but cut from 23.7% of revenue to 22.2% of revenue, and down from $55.5m a year ago.
Although down on 12.7%) a year ago, operating margin has risen from 9.2% last quarter to 11.8%, due mainly to improved operating leverage from the increase in volume.
Likewise, although down on $30.7m ($0.49 per diluted share), net income has risen from $25m ($0.39 per diluted share) last quarter to $27.8m ($0.43 per diluted share).
Capital equipment additions were about $26m, including about $15m in investments in both facility improvements and equipment to bring up the new manufacturing facility in Thailand.
During the quarter, cash and short-term investments have fallen from $555.3m to $532.5m.
“Like many in the telecom and datacom industries, we had headwinds in the first quarter,” notes Lowe. “China has been reducing inventory levels for several quarters now. As inventories decline to targeted levels, demand should increase. We are seeing increased demand from our Chinese customers on certain product lines. These include ROADMs and CFP2 datacom transceivers. Demand for other product lines, notably coherent components remains muted. As anticipated, demand from North America telecom customers was down sequentially in the first quarter as these customers also look to reduce inventory levels. In the second quarter however, we expect North American telecom demand to increase as inventory levels are worked down,” he adds.
“We have made significant progress in rectifying previously highlighted challenges in the production of our Gen 3 fiber laser,” says Lowe. “We expect our fiber-laser business to be on a growth trajectory over the coming quarters.”
In the Commercial Lasers business, Lumentum recently secured some significant new orders, which has helped to drive the book-to-bill ratio to more than 1.5:1 for fiscal Q1.
During fiscal Q1, 3D sensing revenue was limited by bottlenecks in equipment capacity, but these have since been resolved, says Lowe. The ramp up in 3D sensing business should accelerate significantly in fiscal Q2. “We shipped more 3D sensing revenue in October then we did during the entire first fiscal quarter. We expect monthly shipments to increase throughout the end of the calendar year due to strong demand for our products, says Lowe. “Yields to date have been consistent with our expectations.”
For fiscal second-quarter 2018, due mainly to 3D sensing revenue increasing “materially” plus growth in both telecoms and commercial lasers (the latter rising about 20%), Lumentum hence expects revenue to leap by about 48% to $345-375m.
Gross margin is expected to return to the range of low to mid-40. Operating margin should almost double to 21-23%. Diluted earnings per share could almost triple to $1.05-1.25.
“Our new Thailand factory is now production ready for certain 100G datacom transceivers… Our own factory will help with our cost competitiveness, capacity and time to volume,” says Lowe. “We will also be completing qualification of our short-reach 100G transceiver products in the second quarter, which will further expand our 100G datacom opportunity.”
“Our 3D sensing revenue could remain at similar levels in our upcoming March quarter when compared to our second quarter, based on customer feedback and order rates,” believes Lowe.
“Leaders in next-generation consumer electronics, virtual and augmented reality, as well as the automotive industry are looking to laser-based 3D sensing to enhance capabilities and enable new applications. Our investments in new products and technologies position us very well for all of these future trends,” he says.
“We continue to make excellent progress with our ROADMs globally and we believe our new product pipeline will further our leadership position over time,” continues Lowe. “In addition to capturing a large share of the initial network deployments this year in China, we are now sampling new advanced ROADMs specifically designed for China's next generation networks. We believe this positions us extremely well as the ROADM supplier of choice both in the near-term as well as for longer term in China. We expect China ROADM growth will be a meaningful growth driver for Lumentum in the coming years.”
